AT&T Defeat Puts Focus on Wireless Deals

AT&T (T) has thrown in the towel on its acquisition of T-Mobile (DTE:GR) after keeping the mobile industry stalled through much of 2011 while experts, executives, and consumer organizations tried to figure out what such a large deal would mean.

Now that the transaction is off, the industry can return to solving the big question plaguing wireless in the U.S.: How the heck will operators still make money while obtaining spectrum and building the networks they need to support robust demand for 4G wireless services?

I discussed a lot of this in a GigaOM report published on Friday (subscription required), when the merger looked to be heading for its demise. Now that the deal is officially dead and we know a bit more about the terms of the breakup fee, it looks as if T-Mobile might be star of the wireless industry in 2012 as everyone except AT&T and Verizon Wireless try to make a deal with it. Consolidation is inevitable, but AT&T can’t play.

AT&T’s bid to get additional spectrum wasn’t just an attempt to take out a competitor; it really did need more spectrum for its LTE network, and having T-Mobile’s AWS airwaves ready for an LTE deployment would have simplified AT&T’s migration path. As operators move from 3G to 4G services such as LTE, they are learning that the costs associated with remaking and upgrading their networks are substantial. And as they look ahead to spectrum-hogging standards such as LTE-Advanced, they need more megahertz.

Verizon is tackling this by spending almost $4 billion to buy up AWS spectrum from cable companies in a deal that poses competitive issues for the industry, though their downside is less clear-cut than that of AT&T’s bid for T-Mobile. Verizon hopes to amass up to 60 MHz of spectrum for 4G services in some major metro areas if the FCC approves its deal.

Small Players Eye T-Mobile

This leaves smaller players such as Leap Wireless (LEAP) and Metro PCS to wrangle some kind of partnership with T-Mobile now that it may have some of the $4 billion breakup fee and some of AT&T’s airwaves. Dish Networks, the satellite TV player that’s trying to become a mobile operator, has cash and the desire to become a wireless operator with T-Mobile’s help, but the history of satellite players getting into mobile has been pretty iffy.

The most interesting mobile operator to watch in the coming year might be Sprint (S) as it faces choices: Pursue T-Mobile, keep dealing with Clearwire, or continue stringing along LightSquared, which plans to build a 4G LTE network, but is having a hard time moving forward. When it comes to 4G—like Velma Kelly in Chicago—Sprint simply cannot do it alone. No one can, which means AT&T could try again with a more politically acceptable deal.

In a great explanation of why the Federal Communications Commission and the Justice Dept. fought back on the AT&T-Mobile deal, the Washington Post’s Cecilia Kang laid out how AT&T’s aggressive lobbying and the change in political climate during the last few months helped turn off Ma Bell’s former supporters. While industry analysts agreed that the deal would consolidate a large amount of spectrum in the hands of the nation’s top two carriers, it was unclear when the deal was announced in March if it would pass muster with regulators. Many in Washington thought AT&T would triumph with its bold move, especially given how important spectrum ranks in the policy debate.

Big Choices Confront AT&T

AT&T wasn’t wrong when it argued that economies of scale benefit mobile operators; it currently seeks to take advantage of those economies of scale with its proposed LTE network by creating a customized spectrum band plan that would cause troubles for smaller operators. For LTE and future technologies, economies of scale will be more important because they require a large number of megahertz to deliver higher speeds. So will AT&T try to find a way to team up with a smaller operator—or perhaps tap Clearwire to act as an LTE wholesaler?

That would mark a sharp divergence of policy for AT&T and would begin remaking the image of a mobile-broadband provider. Under such a scenario, AT&T might become a super MVNO, piecing together elements of its own network and others to deliver service. The company’s experience at offering Wi-Fi though its Wayport acquisition might help here. Or AT&T might be forced to rethink how it builds its network, letting Wi-Fi play a greater role than it otherwise might have done.

The bottom line is that consumers want to do a lot of things on their mobile phones. Many are only available today via cellular networks, but some of them (surfing YouTube (GOOG), for example, or watching Netflix (NFLX) in the car) are not exactly the best use of licensed wireless. As we wait for T-Mobile to choose a dance partner and AT&T to decide if it wants to play nice with others or rethink its service offering, next year will be much more interesting for wireless. This year there was a lot of movement—not much of it forward. Next year, we could see some real change.